The latest development in China highlights this as Danish brewer Carlsberg acquired a minority stake in craft beer maker Jing-A brewery in early March 2019.

Premiumisation in the overall alcohol market, rising disposable incomes and a large young adult consumer base are driving craft beer demand in China.

We do highlight headwinds to the beer market as volume consumption declines and the prices of barley remain volatile in 2019.

China’s beer market is the largest globally in volume terms. Beer consumption in China is projected to reach 38.3bn litres in total in 2019, dwarfing the market size of developed markets like the US and Germany where beer consumption will reach 21.9bn and 8.0bn litres respectively in the same period. While remaining the largest beer market in world, we highlight a growing premiumisation trend in the Chinese beer market, with consumers preferring to spend on higher-quality craft beer and imported brands over mass-market offerings. As a result, the Chinese beer market is undergoing a signification transformation, with major brewers looking to scale back production of core traditional brands, while increasing their exposure to premium beer via investments in craft beer and partnerships with foreign brands.

Danish beer major Carlsberg acquired a minority stake in Chinese craft brewer Jing-A in early-March 2019. Jing-A brewery is known for the use of Chinese ingredients in their beer such as red rice koji, ginger, and Sichuan peppercorn. With the investment from Carlsberg, Jing-A will be able to expand its production facilities and leverage Carlsberg's distribution network in China and other markets in Asia.

AB InBev has also invested in Chinese craft beer, acquiring Boxing Cat Brewery in Shanghai through its craft beer division - ZX Ventures. Following the acquisition, AB InBev opened a new brewery in Wuhan, China in February 2018 to produce beer for its leading craft beer brands- Goose Island, Boxing Cat and Kaiba - the latter two of which are Chinese.

Domestic Chinese beer majors are also expanding into the premium and craft beer market. China Resources Beer and Tsingtao Brewery, which together hold 40% of the Chinese beer market, are moving away from their low-cost strategies and ‘cheap beer’ image associated with the brands;

Dutch brewer Heineken acquired a 40% stake in CR Beer for USD3.1bn in August 2018. Heineken will gain greater access to a market it has found tough to crack, while for CR Beer, the deal is a way to get into the foreign-dominated premium sector at a time when Chinese demand for lower-end, mass-market brands is waning (see ‘Heineken Looks To Strengthen Foothold In China’s Premium Beer Market’, August 8 2018).

Tsingtao Brewery has introduced an ale in China, which is not as common in China and produced with a different brewing process. The company also launched a wheat beer to expand its high-end product line-up, which now represents 20% of overall sales by volume.

Three Key Factors Factors Driving Craft Beer Growth:

Premiumisation in Alcoholic Drinks Sector – Alcohol spending in China will expand by an average 10.7% annually between 2019 and 2023, while alcohol consumption will expand by 2.3% over the same period. This is indicative of a clear value over volume growth story in China, with beer also set to benefit from this trend. We forecast alcoholic drinks spending to reach CNY428.7bn (USD64.5bn) in 2023, up from an estimated CNY258.5bn (USD39.0bn) in 2018.

Rising Disposable Incomes – Households falling above the middle-income segment ( disposable income of USD25,000+) will more than double, reaching 71.1mn households in 2023, up from 34.0mn in 2019. High incomes will support greater spending on higher-quality and niche brands.

Burgeoning Young Adult Consumer Base – China’s large young adult (20-39 years old) population, projected to reach 415.4mn in 2019, increasingly have more discerning tastes and prefer to consume drinks with a brand identity that appeals to their values. This extends to craft beer which tend to have unique ingredients and authentic brewing styles.

Risks To The Beer Market

Beer majors face headwinds from falling beer consumption. Beer consumption in China is projected to decline by an annual average of 0.6% between 2019 and 2023, which will see beer consumption per capita drop to 31.4 litres per capita in 2023, down from 32.7 litres per capita in 2019. As incomes rise, and tastes become more sophisticated, a value over volume trend is increasingly coming into play, with consumers trading up on price points and switching to other alcoholic drinks (e.g. wine, spirits). Due to stiff competition among beer majors and falling beer consumption at a mass-market level, Japanese brewer, Asahi sold its 20% stake in China’s Tsingtao Beer in December 2017, exiting the Chinese market. This highlights the strategic importance of companies' adjusting their beer portfolios to meet consumer demand, with premium and craft beer brands key to delivering growth.

Beer Consumption Past Its Peak

China- Beer Consumption And Growth, (Litres Per Capita/ % y-o-y)

e/f= Fitch Solutions estimate/ forecast. Source: WHO, Fitch Solutions

The price of barley, a key ingredient in beer production, is likely to be volatile in 2019. This comes on the back of China’s launch of an anti-dumping probe into Australia’s barley exports. China relies heavily on Australia for its domestic demand for malting barley and tensions between the two markets are likely to lead to a drop in imports from Australia and higher prices of barley imported. That said, this risk is weighted to the upside as China can diversify its imports from other suppliers like Canada and France.